Wednesday, June 30, 2004

State Controller calls for CalSTRS on EC

State Controller mr. Westly called on June 28th, 2004 for the State Teachers' Retirement System (CalSTRS) to set responsible standards to encourage companies to link the pay of top executives to long-term company performance.
In a letter to Chairman Mr. Lynes and other CalSTRS members, Steve Westly calls for the fund to develop a comprehensive strategy on the issue, including developing a corporate governance watch list for poor performing companies.

Excessive EC is a significant concern for all
shareholders. Although we have made some meaningful improvements to
our proxy voting guidelines, CalSTRS has no comprehensive strategy for
holding companies accountable for their EC policies. I believe that we must
aggressively engage on the issue.

First, we need to look at EC as a comprehensive
program, not just a set of guidelines to use when voting proxies. The
foundation of our program should be four simple concepts:

2. EC policies should be fully transparent to
shareholders and should be regularly submitted for shareholder
approval;

3. EC should be evaluated over an appropriate
time period (e.g., three to five years), not at just a single
point; and

4. E. contracts should be disclosed in easy-to-understand
language in the proxy statement to allow shareholders to
evaluate the link between pay and company performance.

Second, CalSTRS needs a corporate governance watch list that focuses
on excessive C. We should make clear that companies that
are underperforming their peers should not be overcompensating their
executives. Similarly, CalSTRS should recognize companies with model
EC policies as the leaders that they are.

Third, CalSTRS should engage other institutional investors and
corporate C. consultants to establish "best practices" for
corporate governance. By pursuing an EC strategy
beyond casting votes at shareholder meetings, CalSTRS will have real
impact on public companies that will result in real payoffs for our
fund.

I will be addressing this issue at the July CalSTRS meeting. I look
forward to hearing your ideas about EC and steps
that CalSTRS can take to bring about meaningful reform in this area.
If you would like to discuss these ideas before the July meeting,
please call Toni Symonds at (916) 445-2636.

1 Comments:

Anonymous said...

Westly yesterday sent a further letter to the chairman of CALPERS proposing overhauling corporate governance policies at the nation's largest pension fund with a five-point reform plan that includes singling out poor-performing companies with overpaid executives.

Controller Westly's plan calls for CalPERS to publish a watch list on executive compensation as a way to encourage companies to link the pay of top executives to long-term performance.

The plan also includes:

-- Establishing an independent auditor policy that focuses on the real risks to CalPERS.

-- Rewarding companies that have a positive record on independent auditors and executive compensation.

-- Advocating for national reform, including calling on the Securities and Exchange Commission (SEC) to clarify fee disclosure language.

Like many corporate reform advocates, Westly questioned the effectiveness of withholding proxy votes at nearly 80 percent of public companies, as CalPERS did in the 2004 proxy season. The votes were required under a blanket policy targeting all companies that allow auditors to perform non-audit work - a standard that few companies were able to meet.

As institutional investors across the United States review the past proxy season and begin to prepare for 2005, we all face many tough questions. What makes up a responsible executive compensation package?How many non-independent board members are too many? Can an Audit Committee responsibly approve other services provided by their external auditor?

After WorldCom and Enron, long-term investors like CalPERS must ensure that our investments are managed under sound corporate governance principles. How we accomplish this objective is the $166 billion question before the Board.

We should listen to the advice we have received from Arthur Levitt, Warren Buffett and others and revise our corporate governance strategy. As a national leader, we should not expect to win every cause we pursue - but we need to make sure that we're not tilting at windmills either. Casting too many protest votes - sometimes as asmall minority of shareholders - may be diminishing our effectiveness.The discussion at the CalPERS offsite last month underscored the need for a more outcome-oriented strategy for achieving our corporate governance objectives.

I urge the Board to develop a focused corporate governance strategy that will enable us to build a broader coalition of national support.Our strategy should:

1. Focus on the Real Risks - CalPERS should establish an independent auditor policy that focuses on companies where CalPERS has the most exposure and where fees for non-audit services are highest. The policy should be targeted to a smaller group of companies, and should also distinguish between different services provided by audit firms.

2. Raise the Bar on Executive Compensation Plans - CalPERS should take a leadership position on executive compensation. One way to kick-start this dialogue would be to publish the CalPERS executive compensation watch list.

3. Reward Good Companies - CalPERS should establish a Best Practices Company List for independent audit and executive compensation. Shareowners should recognize executives and boards of directors that get it.

4. Advocate for National Reform - CalPERS should pursue reforms at the national level, recognizing that our resources are most effectively used to lead a national dialogue. We should press the Securities and Exchange Commission (SEC) to clarify the fee disclosure language under the Sarbanes-Oxley Act. Increasing the consistency of fee reporting will enable CalPERS and other investors to better understand a company's management choices.

5. Coordinate with Broad Investment Coalitions - CalPERS should coordinate its activities with national institutional investor coalitions to achieve reforms on audit independence and executive compensation. We will be more successful bringing about real changes if our votes and calls to action represent a majority.

CalPERS has a long history of shareholder action and a reputation as one of the most powerful voices in the marketplace. That doesn't happen just because of our size. It happens through leadership, credibility and long-term commitment to end goals that improve shareholder value. We need to redefine our corporate governance strategy and return to our roots of shareownership.

The offsite provided members with a real opportunity to review the past year and refocus our efforts. We owe it to the beneficiaries to not only adopt sound policies to protect their interests, but to also bring about real reform. Let us build on our momentum and continuetoward a more outcome-oriented strategy on corporate governance.

I look forward to discussing our strategy at the October Investment Committee meeting. If you would like to discuss these concepts ahead of time, please contact Toni Symonds or me at (916) 445-2636.